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Presentation at the FAC/IDS food price workshop, February 2012 http://www.future-agricultures.org/events/food-price-volatility
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Financial Markets and Food Price Volatility
Proposals to reduce market related volatility
Monday 6 February 2012Institute of Development Studies
Christine Haigh
Starting pointImpact of financial speculation:“Large financial flows associated with herding behaviour of financial
investors can sometimes amplify commodity price movements and may sometimes cause prices to deviate temporarily from values consistent with physical supply and demand conditions… A growing body of research supports the view that financial investors have affected price dynamics over short time horizons.”
Report of the G20 Study Group on Commodities under the chairmanship of Mr. Hiroshi Nakaso
Opportunity cost:Lack of investment in productive economy“Revenues generated from commodity production in developing
countries have to be increasingly set aside as insurance against volatile prices, as opposed to providing a steady stream of income to fund investment in economic diversification”
UNCTAD (2012) Recent developments in key commodity markets: trends and challenges
What are these markets for?
• Price discovery
• Hedging commercial risk
Functions increasingly disrupted
Moral and practical imperatives to act
A historical perspective• 1930s: US Securities Act, Securities Exchange Act,
Commodity Exchange Act• 1991: exemptions from position limits; Goldman Sachs
creates commodity index fund• 1990-2000s: further deregulation e.g. Commodity Futures
Modernization Act of 2000 - deregulation of OTC• 2002-2008: number of derivative contracts in commodities
increases by 500 per cent• 2010: Dodd Frank Act passed• 2011: CFTC position limits rule instituted• 2012/13: European commodity derivative markets
regulated?
Transparency
• Price discovery
• Facilitate understanding of markets
• Prevent insider trading due to information asymmetries
• Enable better regulation
TransparencyExchange trading - virtually no need for OTC trading- most can be broken down into standardised
components- MiFIR: risk that substantial OTC market will remain
Position reporting- should be comparable to CFTC- MiFID: may not be standardised across EU
Balance of participants
June 1996
Hedging (88%)
Speculation (12%)
June 2011
Hedging (39%)
Speculation (61%)
Market share (Chicago wheat futures)
Position limits
• “Over 150 years of futures trading history demonstrates that position limits are necessary in commodities of finite supply to curb excessive speculation and hoarding.”
Ann Berg• Used in countries including South Africa, Brazil, India,
China; being re-introduced in US• Transparent• Provide regulatory certainty• Could be introduced gradually and reviewed for
effectiveness whilst ensuring sufficient liquidity, and adapted for different types of participant
Position limits
• Individual limits – stop market abuse• Category limits – address balance of participants
and activities
MiFID:• “Alternative arrangements”• Purpose not to tackle excessive speculation• Only individual position limits
Liquidity: when does rain becomes a flood?
• Liquidity important, but…• Liquidity ≠ volume of trading• Recent rise in liquidity associated with higher volatility• “It does not follow that ‘more liquidity is always limitlessly
beneficial’ since beyond some point there must be diminishing marginal returns to additional liquidity. It is also possible that more liquidity, while in some ways beneficial to end-users, could also, by facilitating pure speculation, produce more variable medium-term price trends.”
Adair Turner
Position management
• Poor track record: Armajaro, Frontier Agriculture
• Non-transparent• Reactive• May be perceived as subjective or
discriminatory• Creates conflict of interest for exchanges
Recipe for reducing volatility
• Exchange trading
• Position reporting
• Position limits
Regulation of commodity derivative markets is necessary but not sufficient for addressing
food price volatility.